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1. Introduction THE INDONESIAN JOURNAL OF BUSINESS ADMINISTRATION Vol. 2, No. 6, 2013:735-740 FINANCING STRATEGY ANALYSIS TO MAXIMIZE COMPANY’S VALUE CASE STUDY: PT ABC Jemmy Wangsaputra and Subiakto Sukarno School of Business and Management Institut Teknologi Bandung, Indonesia jemmy.wangsa@sbm‐itb.ac.id Abstract— As a newly born mining company, PT. ABC needs more funding to finance the capital expenditure. The capital expenditure is needed in order to ramp up the company production capacity. The current 0.5 Million Ton 2012 production cannot meet their target capacity which is 2.3 Million Ton. So, they need the additional funds to finance the capital expenditure immediately. The fund needed is approximately 5 Millions USD.There are two source of funding alternatives, which are internal and external sources. The internal source which is retained earnings is not possible due to the insufficient funds. The possible external sources are bank loan and advance from customer. So, there are three possible forms of financing alternatives for PT. ABC, which are bank loan, advance from customer and the combined of both bank loan and advance from customer. The concern for the company is they have a plan to become publicly traded company in near future, so this immediate financing need should be aligned with the company medium and long term plan. The parameter that needs to be analyzed from every alternative is the impact on company value. The company value of every alternative is analyzed using DCF (Discounted Cash Flow) method and Relative valuation method. Based on the analysis using DCF and Relative valuation method, the best possible alternative is the combined of both bank loan and advance payment. That alternative resulted in the highest equity value which ranged between Rp 2,421 Billions to Rp 3,556 Billions. Keywords: Funding Alternatives, Discounted Cash Flow Valuation, Relative Valuation 1. Introduction Demand of power all around the world is always increasing year by year. There are two sources of power, renewable resources and un‐renewable resources. Even though renewable resources are now being encouraged, the portion is still small compared to the un‐renewable resources. So, the un‐ renewable resources are still the most valuable commodity. There are several kind of un‐renewable resources, some of them which are quite popular are oil, gas, and coal. Coal is commonly used by power plan to produce electricity. As the demand for coal is still huge, the coal mining company is continuously increasing their production capacity. PT. ABC is a newly developed mining company which operates in Kalimantan. ABC is a fiction name only to be used in this research as demanded by the real company to protect the company’s confidential data. The project is located in the East Kalimantan Province, Indonesia. The project is approximately between the capital city of East Kalimantan, Samarinda, and the sea‐port city of Balikpapan. PT. ABC was approached by the Government of Indonesia as a potential developer of the coal resources of the area. Beginning in 2008 and continuing through 2011 PT. ABC undertook exploration studies and baseline studies. This baseline studies are ongoing and will continue into 2016. PT. ABC applied for the mining concession in 2006. In 2005 the block was awarded to PT. ABC. Following a more definitive exploration program, PT. ABC started mine infrastructure development in 2009; stripping and coal production in 2010. Primarily, the company is in start up phase, so they need to expand their production capacity rapidly, but the actual condition didn’t go as planned. The first and second year production shows that the 735 Wangsaputra and Sukarno / The Indonesian Journal of Business Administration, Vol.2, No.6, 2013:735‐740 company is expanding too slowly. So they need some extra performance to meet their capacity target for the following years. In order to expanding the production capacity, they need additional capital expenditure to build more infrastructures. PT. ABC cannot finance the additional capital expenditure by their own cash flow, so they looked for other source of financing. The current funding alternatives are in form of bank loan, advance from customer and also the combination of both bank loan and advance from customer. The issue now is PT. ABC has a plan to go public in near future, and the company doesn’t want this immediate capital expenditure funding jeopardize the IPO plan. Even, if possible, this capital expenditure funding should accommodate the IPO plan to be more achievable. Regarding the considerations above, PT. ABC needs to find out which form of capital expenditure alternatives will result in better company valuation. So, the business issue of PT. ABC is about how to choose the capital expenditure funding alternatives in order to maximize the company value. Which forms of funding is the most suitable option. 2. Business Issue Exploration PT. ABC is now on the third year since starting their production. Before they started the production, they already have planning or target that they need to follow. The plan is based on their concession situation, the terrain, and historical data of other comparable mining company. With the 69.2 million tons reserves, the company planned to do the exploration for 30 year. As the company production started in 2010, the actual realization of the target production didn’t go as planned before. The company is struggling to meet the targeted exploration capacity. Figure 2.1 shows the production capacity comparison between the target, actual, and 2012 till 2014 projection. Tabel 1. Production comparison 3,000,000 2,000,000 1,000,000 ‐ 2010 2011 2012 2013 2014 2019 2024 2029 2034 2039 ‐ ‐ ‐ ‐ ‐ 2015 2020 2025 2030 2035 Actual Projection Target In order to increase the production capacity, the company needs to lean out their production line, build more infrastructures and provide more equipment needed. To finance those needs, the company needs additional source of funds. A. Conceptual Framework The conceptual framework of this research is used to explore the business issues of PT. ABC which is related to funding issue. By deeply exploring the issues, the root cause can be found, and the solution can be formulated. Figure 1. Conceptual Framework 736 Wangsaputra and Sukarno / The Indonesian Journal of Business Administration, Vol.2, No.6, 2013:735‐740 Basically, the first source of fund for a company is retained earnings, which is the internal source of fund. Sometimes retained earnings are insufficient to finance rapid expansion or big projects of the company. When retained earnings are no longer sufficient, the company will start to consider looking for external source of fund. These external sources of capital are in form of debt or equity. For debt itself, PT. ABC has three possible alternatives, which are loan from holding company or related party, corporate bonds, and loan from banks. For equity form source of capital, the company is only considering IPO (Initial Public Offering). B. Method of Data Collection and Analysis The needed capital expenditure can be fulfilled internally or externally. The internal source of fund is retained earnings. The external sources of fund are debt and equity. For debt itself, the company has several options, which are holding or related party loans, corporate bonds, and bank loans. For equity, the only considered option is IPO. • Retained Earnings The actual and forecasted retained earnings are shown in Table 2.4. The capital expenditure needed is 86 Billions rupiah. The forecasted retained earning for 2012 is only 45 Billions rupiah, so it is insufficient to finance the capital expenditure. Tabel 2. Retained Earnings (in Millions Rupiah) 2010 2011 2012 2013 2014 A A E E E Deficit / Retaine (3,26 (5,43 45,46 100,4 144,6 d 1) 4) 2 19 11 Earning s • Holding or Related Party Loan For the past few years since PT. ABC is established, the kind of debt the company used is only shareholder loan. For this kind of debt the company got no interest rate, or in other word they don’t need to pay the interest. In 2011, the company just converted 90 billion rupiah shareholder loan into equity. And now the holding just stated that they won’t give another loan. So, shareholder loan can’t be used to finance the capital expenditure. • Bank Loan PT. ABC, they are already passed the feasibility test of several banks. Many banks willing to give them loan, it’s just a matter of which bank will give the lowest interest rate. And until now, the most possible choice is BNP Paribas, because of the good relationship between them. • Corporate Bond PT. ABC is newly established company, and hasn’t scores a profit since the establishment, the rating is obviously will be very bad. In order to make people buy bad rating bonds, the coupon rate must be high, and make it very expensive source of fund. Therefore, because of this reason, the corporate bond alternative is worse than debt. • Advance from Customer The mechanism for advance payment is much simpler than bank loan. The collateral is the coal reserve which will be sold to the customer in the next certain period. Since PT. ABC is a newly established mining company, and the financial condition hasn’t showing good performance, it will be easier to get the advance payment rather than bank loan. • IPO For the immediate capital expenditure need, IPO is not a suitable option. First is because the fund needed for this immediate capital expenditure is relatively small compared to the IPO scale. Second, IPO is a complicated process which needs relatively long time, and this capital expenditure is needed immediately. 737 Wangsaputra and Sukarno / The Indonesian Journal of Business Administration, Vol.2, No.6, 2013:735‐740 After developing conceptual framework, student is required to analyze every factor contained in the framework.
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